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Full text of "Determination of reasonable charges under part B of Medicare"

Reasonable 
Charges 

Under Part B of 
Medicare 



A Basic Text 



Health Care Financing Administration 

Medicare Bureau 

MAB Pub. No. 028 (9-77) 



INTRODUCTION 



This booklet, Determination of Reasonable Charges Under Part B of the 
Medicare Program , is designed for individuals who have a general knowledge 
of Medicare and its provisions. This handbook should in no way be 
considered as a policy guide . Its purpose is to impart an understanding 
of the reasonable charge provision of the supplementary medical insurance 
program and its application in paying Medicare benefits for physicians' and 
other suppliers' services. It is divided into three parts as follows: 

Part 1 - Summary 

The Summary is written in simple and straightforward language and, 
as the name implies, it summarizes the basic procedures involved 
in the determination and use of reasonable charges. This part of 
the booklet may be especially useful for explaining reasonable 
charges to beneficiaries 

Part 2 - Footnotes 

The footnotes part of the booklet examines the procedures covered in 
the Summary in greater detail. The language is somewhat technical 
since precision of meaning is necessary. This part of the booklet 
is intended for anyone who wishes to reach a deeper understanding of 
the intricacies of reasonable charges. 

Part 3 - Glossary 

The Glossary contains explanations of some of the more frequently 
used terms in this booklet. 



PART 1 - A SUMMARY OF THE BASIC 



REASONABLE CHARGE METHODOLOGY 



(All footnotes follow this summary in Part 2 - Footnotes.) 



I. When the Congress was considering the legislation which later became 
the Medicare law, it considered carefully the question of the best 
method of making payments for services of physicians and to suppliers 
of other medical services and items and equipment covered under the 
Medicare program. After studying various methods which could have 
been used, the Congress decided that the method which the law terms 
the "reasonable charge" method would best serve the needs of the 
people who would be affected by the program. 

II. Under the Medicare law, the carriers that process and pay claims for 
Medicare Part B services are responsible for insuring that payments 
are based on the "reasonable charges" for physicians' and suppliers' 
services. However, the basic methods and procedures used by carriers 
in determining reasonable charges must be consistent with Medicare 
law, regulations, and the policy guidelines issued by HCFA to implement 
them. 

III. Medicare_will make payments for physicians' and suppliers' covered 

services after the beneficiary has paid the first $60 of reasonable 
charges for those services each year. The first $60 is the "deductible." 
Medicare pays 80 percent of the "reasonable charge" for covered 
services after the deductible has been met. The beneficiary is 
responsible for the remaining 20 percent. 

IV. The "reasonable charge" for a physician's or a supplier's service is 

the lowest of three kinds of charges — the actual charge, the physician's 
or supplier's customary charge, and the prevailing charge. The actual 
charge is the charge that the physician or supplier billed for his 
service. The customary charge is the charge the physician or supplier 
usually bills most of his patients for the same service. The prevailing 
charge is the lowest charge high enough to include at least three-fourths 
of the bills for the same service billed by all the physicians or 
suppliers in the same area. Whichever one of these three charges is 
the lowest is called the "reasonable charge." For instance, let us 
say that the prevailing charge for a service in the area where Dr. Ames 
practices is $20 and Dr. Ames usually charges $18 for that service 
(his customary charge). Then, if he bills $21 for that service (his 
actual charge), the "reasonable charge" for that service would be the 
lowest of the three charges — $18. This is why a "reasonable charge" 
may be lower than what the doctor billed for. 

V. The data from which the customary and prevailing charges are 
established are collected during a calendar year (January 1 to 
December 31). Customary and prevailing charges are revised at the 
beginning of each fee screen year based on the charge information 
collected during the preceding calendar year. For example, fee screen 
year 1978 (July 1, 1977 to June 30, 1978) prevailing charges were based 



on calendar year 1976 (January 1, 1976 to December 31, 1976) charge 
information. There are several reasons for this lag in the Medicare 
program's recognition of fee increases, and for not updating the 
allowances more frequently. One is that a charge must be made 
over a period of time before it can meet the requirement that it 
be "customary." Also, the statistics on charges on which the 
carriers' allowances are based must be collected over a period, 
and at the end of that period the data must be tabulated and 
analyzed before they can be put into effect. Finally, were Medicare 
to recognize increases in charges as quickly as they are made, 
Medicare might lend support to a rapid escalation of the rates. 

VI. The customary charge is the amount which best represents the charge 
usually made by a particular physician or supplier for a specific 
medical service. 6 The term "best represents" means that if Dr. Brown 
charged $7 for the same service 80 times during a calendar year, 
$6 twice, and $8 three times, $7 would "best represent" the charge 
usually made to his patients for that service. 

VII. In calculating the customary charge screens to be used during a 
fee screen year, each charge the physician or supplier has made 
for a particular service during the preceding calendar year is 
listed by the carrier in ascending order. The lowest charge on 
the list which is high enough to include at least half of the 
listed charges is then selected as the customary charge for the 
service . 

VIII. The carrier computes the prevailing charge after looking at all 

charges made for similar services by all the physicians or suppliers 
within a certain locality. (See paragraph XI) The prevailing 
charge is calculated by finding the customary charge high enough 
to include at least three-fourths of the "weighted" customary charges 
of all physicians or suppliers rendering that particular service in 
the locality. This prevailing charge establishes an overall 
limitation on the charges which the carrier accepts as reasonable 
for a specific procedure or service, except where unusual circum- 
stances or medical complications call for a higher charge. 

IX. The procedure for establishing the prevailing charge is illustrated 
by the following example: 

Customary Number of Cumulative 

Charge for Office Visits Number of 

Office Visit* (Weighting) Office Visits 



Number of 




Office Visits 




(Weighting) 




1402 




1115 (+ 1402 


= ) 


1680 (+ 2517 


= ) 


803 (+ 4197 


= ) 



$5 1402 1402 

$6 1115 (+ 1402 =) 2517 

$7 1680 (+ 2517 =) 4197 

$8 803 (+ 4197 =) 5000 

*A11 physicians within the locality. 



In the above example, three-fourths of the total number of office 
visits (5000) equals 3750 visits. The prevailing charge in this 
case is the customary charge listed for the 3750th visit, which 
falls among the $7 charges. Therefore, $7 is the prevailing charge. 

X. In 1972 Congress decided to let Medicare prevailing charges go up 
only as much as inflation in general. This limit was the so-called 
"economic index." The economic index for fiscal year 1978 was 
35.7 percent. The economic index only limits how much Medicare 
prevailing charges may increase above 1973 levels. In fee screen 
year 1978 Medicare prevailing charges were allowed to increase up 
to 35.7 percent above their fiscal year 1973 levels. Incidentally, 
the economic index is only applied to prevailing charges. In 
other words, only if the charge the physician bills and his customary 
charge are higher than the prevailing charge where the physician 
practices will the "reasonable charge" possibly be cut back by 
the economic index. 

XI. In calculating the prevailing charge for a service "in the locality," 
carriers use charge data from that locality. A locality will 
usually be a subdivision of a State, which includes a cross-section 
of the population. Single "localities" have sometimes been 
developed by combining all areas in a region classified as 
"metropolitan," "urban," or "rural" areas or by combining areas 
with similar charge patterns. Other carriers, particularly the ones 
serving sparsely populated states, have found that there is very 
little variation in charge patterns within their service areas and 
so the whole service area of each of those carriers is treated as 
one locality. Separate prevailing charges in a locality have also 
been recognized by the carriers for physicians in different kinds of 
specialty practice. ' * Medicare payments for the same service, 
therefore, may vary from one locality to another and from one 
physician to another in the same locality. This payment variation 
reflects the patterns of charges that physicians and suppliers of 
services l- 5 have themselves established over time. 

XII. In addition to establishing the customary and prevailing charge 

criteria for judging the reasonableness of a charge, the law says 
that the reasonable charge for a service may not be higher than the 
allowable charge applicable to the carrier's own policyholders for 
a comparable service under comparable circumstances. 

XIII. Physicians and suppliers may choose to "accept assignment" of a 

beneficiary's claim. Under this provision of the Medicare law, the 
beneficiary need not pay any difference between what the physician 
or supplier actually charges and what is determined to be the reasonable 
charge for his services. When the physician or supplier bills 
Medicare directly and agrees to accept assignment of the Medicare 
Part B claim, he must then agree to accept Medicare's determination 



7 



of the reasonable charge as his total charge. Medicare then pays 
the physician or supplier 80 percent of the reasonable charge. 
The physician or supplier may charge the beneficiary for only the 
remaining 20 percent of the reasonable charge. For example, if 
the physician or supplier accepted assignment of a claim and the 
reasonable charge was $18 for the service for which the physician 
or supplier billed $21, he would be paid $14.40 (80 percent of $18) 
by Medicare and he can charge the beneficiary only for $3.60 
(20 percent of $18). The physician or supplier would not be allowed 
to charge the beneficiary for the other $3 of the original bill 
($21 - $18 = $3). On the other hand, if the physician or supplier 
will not accept assignment of the claim, he may charge the beneficiary 
for the $3.60 (20 percent of $18) and for the remaining $3 of the 
original bill. Medicare does not pay for services not covered by 
Medicare whether or not the claim is assigned. 



PART 2 - FOOTNOTES 



The reasonable charge is the basis of payment under the supplementary 
medical insurance program for medical and other health services 
furnished by physicians, medical groups, independent laboratories, 
suppliers of ambulance services, and suppliers of durable medical 
equipment, prostheses, etc. 

In the administration of the medical insurance program, the carrier 
has primary responsibility for determining reasonable charges. The 
careful determination of reasonable charges in a way which is 
equitable both to those rendering the services and to those paying 
the premiums is a very important responsibility. The possible impact 
on fees charged the general public is a matter of broad concern that 
should be considered in applying the criteria for determining 
reasonable charges. The amount of future premiums under the medical 
insurance program will be directly affected by carrier performance 
in determining reasonable charges. 

The reasonable charge determinations made by carriers are not 
normally reviewed by the Health Care Financing Administration on 
a case-by-case basis. However, the Health Care Financing Admin- 
istration has an overall responsibility for the administration of 
the supplementary medical insurance program. The basic methods and 
procedures used by carriers in determining reasonable charges must 
therefore be consistent with the law, the regulations, and the broad 
principles and policy guidelines issued by the Health Care Financing 
Administration. 

Any individual who is enrolled under the supplementary medical 
insurance plan established by Part B is entitled to have payment made 
to him, or on his behalf, for certain medically reasonable and 
necessary medical and other health services. Subject to certain 
conditions, limitations, and exclusions, payment may be made for 
physicians' services (including diagnosis, therapy, surgery, consulta- 
tions, and home, office, and institutional calls); for home health 
services for up to 100 visits furnished by a participating home health 
agency during a calendar year; for services and supplies, including 
drugs and biologicals which cannot be self-administered, furnished 
as an incident to a physician's professional service, and of kinds 
which are commonly furnished in a physician's office or clinic and 
are commonly either rendered without charge, or included in the physician's 
bill; for hospital services and supplies (including drugs and 
biologicals which cannot be self-administered) incident to physicians' 
services rendered to outpatients; for diagnostic X-ray tests (including 
portable X-ray tests), diagnostic laboratory tests, and other diagnostic 
tests; for X-ray therapy, radium therapy, and radioactive isotope 
therapy (including materials and services of technicians administering 



11 



such therapies); for surgical dressings, and splints, casts and other 
devices used for reduction of fractures and dislocations; for rental 
or the purchase of durable medical equipment, including iron lungs, 
oxygen tents, hospital beds, renal dialysis systems, and wheelchairs 
used in the patient's home; for prosthetic devices (other than dental) 
which replace all or part of an internal body organ, including 
replacement of such devices (including colostomy bags and supplies 
directly related to colostomy care), also including certain renal 
dialysis facility dialysis services; for leg, arm, back, and neck 
braces, and artificial legs, arms, and eyes, including replacements 
if required because of a change in the patient's physical condition; 
for ambulance services when the use of other means of transportation 
is contraindicated by the individual's condition; for outpatient 
hospital diagnostic services including drugs and biologicals required 
in the performance of such services which are: (1) furnished to 
outpatients by a hospital (or by others under an arrangement made by 
a hospital); and (2) ordinarily furnished by such hospital (or under 
such arrangements) to its outpatients for the purposes of diagnostic 
study; for outpatient physical therapy and speech pathology services 
which are furnished by or under arrangements made by a participating 
clinic, rehabilitation agency, public health agency or other provider 
of services; and for outpatient physical therapy services which are 
furnished by or under the direct supervision of a qualified physical 
therapist in independent practice in his office or in the individual's 
home. 

The two criteria set out in the Medicare law (section 1842 of 
title XVIII) which must be considered in determining the reasonable 
charge for a service are: (a) the customary charge for similar services 
generally made by the physician or other person furnishing such 
services; and (b) the prevailing charge in the locality for similar 
services. Therefore, the reasonable charge for a specific service, in 
the absence of unusual medical complications or circumstances, may not 
exceed the lowest of: (a) the physician's or other person's customary 
charge for that service; (b) the prevailing charge made for similar 
services in the locality; or (c) the actual charge of the physician or 
other person rendering the service. A charge which exceeds the 
customary charge or the prevailing charge in the locality, or both, 
may be found to be reasonable if unusual circumstances or medical 
complications requiring significant additional time, effort, or 
expense are such as to actually constitute a distinguishably different 
service. The law also provides that the reasonable charge for a 
service may not exceed the charge applicable for a comparable service 
and under comparable circumstances to the policyholders or subscribers 
of the carrier. Also, under the law, other factors that may be found 
necessary and appropriate with respect to a specific item or service 
to use in judging whether the charge is inherently reasonable, should 
be taken into account. 



12 






The income of the individual patient may not be considered in 
determining the amount of the reasonable charge. Consideration of 
a patient's income in determining the reasonable charge could be 
looked upon as an inverse means test — this is, it would result in a 
situation under which the Medicare program would pay more for bene- 
ficiaries with high incomes than it would pay for beneficiaries with 
low incomes. There is no provision in the Medicare law for a carrier 
to evaluate the reasonableness of charges in light of an individual 
beneficiary's economic status. 

The customary and prevailing charge limits used by the carriers are 
updated as early as possible at the beginning of each fee screen year 
(the 12-month period beginning July), using the available statistics 
on charges physicians and other persons have made for services derived 
from claims processed or from claims for services rendered during 
all of the immediately preceding calendar year. For example, the 
limits used during fee screen year 1978 (July 1, 1977 - June 30, 1978) 
were based on the charges made in calendar year 1976. Once the carrier 
has made a general update of its customary and prevailing charge screens 
for a fee screen year, further revisions in these screens are not made 
during that fee screen year, except (1) where there are equity consider- 
ations as described later; or (2) to correct erroneous calculations; or 
(3) to establish screens for new physicians/suppliers or new services. 

The customary charge is the amount which best represents the actual 
charges made for a given medical service by a physician to his 
patients in general, or by other persons who supply other medical and 
health services to the general public. The carrier therefore obtains 
information on the customary charges of physicians and other persons 
not only from the Medicare program, but from other available sources, 
e.g., from its own programs, from other insurance programs, from the 
Federal Employee Health Benefit Program, from CHAMPUS, from any studies 
conducted by State or local medical societies, and from public agencies. 
It also may ask physicians or other persons for their charges for 
services rendered to the public in general where the carrier decides 
that circumstances will permit this. 

In calculating the customary charge for a certain physician or 
supplier for a given service, each charge the physician or other 
supplier has made for that service is arrayed in ascending order. 
The lowest actual charge which is high enough to include the 
median of the arrayed charge data is then selected as the physician's 
or other supplier's customary charge for the service. However, where 
the charges generally made by a physician or other supplier to other 
patients are lower than those made to Medicare beneficiaries, the 
lower charges are to be used as the basis for establishing the 
Medicare reasonable charge screen. A minimum of three charges 
where two are identical, or four charges where each is different 
is required to calculate a customary charge. 



13 



Generally, when an established physician moves his practice either 
to an area serviced by a different carrier or to a different 
locality serviced by the same carrier, there will already be an 
established customary charge screen for his services. Therefore, 
the customary charge screen in use before the physician moves his 
practice may also be used in his new location. If the physician 
moves to an area serviced by a different carrier, the new carrier 
may request the customary charge screen from the old carrier. However, 
at the request of the physician, the carrier may establish a new 
customary charge screen at the 50th percentile level, provided it 
has determined that the charge levels or costs of practice in the 
new area or locality are substantially higher than those in the 
old area or locality. 

In some instances, a new physician will join with one or more 
established physicians who either already have a group customary 
charge or who wish to establish a group customary charge. When the 
customary charge screen for a new physician is established at the 
50th percentile level, the carrier will not include these deemed 
customary charges in the calculation of the group customary charge 
screen. However, the carrier applies the group customary charge 
screen in determining reasonable charges for all services the new 
physician renders as a member of a medical group that has established 
the custom of charging uniform fees without regard to which member 
of the group provides the service. 

8. Prevailing charges are those charges which fall within the range of 
charges that are most frequently and widely used in a locality for a 
particular procedure or service. For any fee screen year, the prevailing 
charge limit in a locality for a service is calculated as the 

75th percentile of the customary charges determined for that service 
(if allowable under the economic index limitation). In this calculation, 
each customary charge for the service is arrayed in ascending order 
and weighted by how often the physician or other person rendered the 
service (as reflected by the charge data the carrier used to calculate 
the customary charge). The lowest customary charge which is high 
enough to include the customary charges of the physicians or other 
persons who rendered 75 percent of the cumulative services is then 
determined as the prevailing charge for the service (subject to the 
economic index limitation) . A minimum of five customary charges is 
required to calculate the prevailing charge. 

9. Where it is necessary to establish customary charges through the use 
of price lists, these customary charges are used to also establish 
the required prevailing charge limits. In this regard, if a carrier 
cannot derive precise data on the frequency of services from its 
records, it may use any information it has about the volume of business 
done by various suppliers in its area in order to weight the customary 
charges used to calculate the prevailing charges. 



14 



When a carrier does not have adequate statistics on charges for 
all of a calendar year , e.g., for suppliers of medical equipment, 
prosthetics, ambulance services, or for new services, the fees 
charged and the price lists in effect as of June 30 of that calendar 
year only may be used. The intent is to use a price list which can 
reasonably be assumed not to exceed the median of the prices charged 
by the supplier for his items and services during that calendar year. 

Once a carrier has established the customary charge screens for a 
fee screen year, further increases (other than to correct errors) are 
permitted only in individually identified and highly unusual 
situations where equity clearly indicates that the increases are 
warranted. Where a carrier has permitted an increase in a customary 
charge in such situations, the increased amount is recognized as 
the customary charge for the next fee screen year if it exceeds the 
median of the charges made by the physician or other person for the 
service during the calendar year immediately preceding the start 
of that fee screen year. 

Physicians who begin a new practice may include (1) physicians 
beginning their first practice and (2) established physicians who 
change their practice either to an area serviced by a different 
carrier or to a different locality serviced by the same carrier. The 
customary charge for each service rendered by a new physician will 
be based on the 50th percentile of the weighted customary charges 
the carrier used to establish the prevailing charge in the locality 
for the same service and specialty group. The use of the 50th 
percentile of weighted customary charges guarantees that the new 
physician is in a position whereby the carrier's customary charge 
screen for a service he renders will be set at a level which is no 
lower than the customary charges of established physicians in the 
locality with the same specialty status who rendered at least 
50 percent of such services. 

Payment under Part B for a service rendered by a new physician will 
be based on the lowestof (1) the actual charge made for the service 
by the physician, (2) his customary charge for the service established 
at the 50th percentile level, or (3) the applicable prevailing charge 
for the service. The customary charge screen for a new physician 
should be maintained at the 50th percentile level until the carrier 
(1) makes a general revision of its reasonable charge screens at the 
beginning of a new fee screen year, and (2) has 3 months charge experience 
for the new physician derived from the same base year in which charge 
data is taken to calculate the customary charge screens for established 
physicians. When 3 months charge data is available at the time of 
a general revision of a carrier's reasonable charge screens, the 
50th percentile limitation is no longer applicable and the customary 
charge screen for the services of the physician is established based 
on the median of these charges . 



15 



10. The Medicare law provides that prevailing charge levels used in 
determining Medicare reasonable charges for physicians' services 
may be increased above the level for fiscal year 1973 only to the 
extent determined to be justified by the Secretary on the basis 

of appropriate economic index data. The economic index figure will 
be furnished by the Bureau of Health Insurance to all carriers. The 
economic index limitation will apply only to increases in prevailing 
charges and only to physicians ' services . It will not affect carriers ' 
customary charge calculations. The law established the Medicare 
carriers ' prevailing charge screens for fiscal year 1973 (that were 
based on physicians' charge levels during calendar year 1971) as the 
base for measuring all future increases. The economic index calculated 
for each fee screen year will, therefore, reflect on a cumulative basis 
the changes th^t have taken place in physicians ' practice expenses 
and in general earnings levels since calendar year 1971. 

11. Prevailing charges are those charges which fall within the range 
of charges that are most frequently and widely used in a locality 
for a particular procedure or service. For the purpose of making 
reasonable charge determinations, a locality is the geographic area 
for which the carrier is to derive the prevailing charges for 
procedures and services. Usually a locality will be a political or 
economic subdivision of a State and must include a cross-section of 
the population with respect to economic and other characteristics. 
Where people tend to gravitate toward certain population centers to 
obtain medical care or service, localities may be recognized on a 
basis constituting medical service areas (interstate or otherwise), 
comparable in concept to "trade areas." 

Carriers delineate localities on the basis of their knowledge of local 
conditions. The localities may differ in population density, 
economic level, and other major factors affecting charges for 
services. However, localities are not so finely made that they would 
include only limited areas or small population groups (e.g., a very 
rich or very poor neighborhood). Where appropriate, different 
localities should be established with respect to different types and 
levels of services. For example, a carrier may determine that a State 
has five localities for general practitioners ' charges , but only one 
locality (the entire State) for members of a particular specialty 
group. This might happen where there are not enough members of the 
specialty group in any one of the five localities to establish a valid 
basis for deriving the prevailing charges for their services for any 
one locality. 

12. Charging practices in a locality may be different for physicians who 
practice different specialties; e.g., general practitioners, internists, 
etc. Existing variations in the level of charges between different 



16 






kinds of practice or service could, in some localities, lead to 
the development of more than one prevailing charge screen. Carriers 
are responsive to the existing patterns of charges made by physicians 
in the service area and therefore establish separate prevailing 
charges for different specialties, but only where this would be 
in accord with actual practice. For example, a cardiologist may 
charge $25 for a specific examination while a general practitioner's 
charge is $15 for a similar examination. Both charges are customary 
for each physician and fall within their respective ranges of 
prevailing charges in the locality. Thus, the charges made by each 
of these physicians may be accepted as reasonable charges. 

13. Anesthesiologists provide their services during surgical procedures. 
Traditionally, this specialty practice has charged and has been 
paid through the use of relative value studies and conversion factors. 
Frequently, State societies of anesthesiologists establish both the 
relative value units and conversion factors to be used by its members. 
In billing for their services, these physicians have identified two 
elements, one representing the skill, risk, etc. involved in the 
operation (the base value) and the other representing the length of 
time of the operation. (Time units are usually counted in 15-minute 
intervals.) 

For example, a relative value study entry for an appendectomy might 
show: 

3621 - appendectomy 
Value - 40 
Anesthesiologist 4 + T. 

Explanation: The relative value for the surgery is 40. The 
base value for the anesthesiology is 4 units with an additional 
unit added for each 15 minutes of time for the operation. A 
45-minute appendectomy then would have a value of 7 (base-4, 
time-3 (three 15-minute periods)). 

In establishing reasonable charge limits for these services, carriers 
are expected to develop a median customary charge for each anesthesiol- 
ogist from his accumulated charge experience. The carrier could also 
establish a conversion factor by accurately recording the basic 
relative value units and time relative value units for the procedures 
on which each anesthesiologist rendered his service. This data 
together with the actual charges for the procedures made by these 
anesthesiologists would yield the conversion factors. The prevailing 
charge screen would be established as a conversion factor based on 
the 75th percentile of the customary charge conversion factors. 



17 



14. Physicians had for some time been faced with the problem of 
determining a fair value for their services . One method of 
identifying the relative value of each procedure or service 
provided by physicians is called a Relative Value Study. It is 
a means of taking a medical or surgical procedure and assigning 
a numerical value to it, relative to some basic procedure. This 
numerical value is called the relative value. Generally, a relative 
value study is composed of several distinct sections dealing with 
surgery, radiology, pathology or laboratory services, and medical 
services - physician visits, examinations, consultations, etc. 
The values assigned to the procedures in each of these sections are 
not related to the values in the other sections. To arrive at a 
fee, for the physician, (or the reasonable charge, for a carrier,) 
the relative value is multiplied by a conversion factor which is a 
dollar amount. Either is chosen on the basis of estimate or analysis 
of data. 

The relative value study has several advantages for not only Medicare 
but other third-party payers. These advantages are: 

(1) the narrative description of the various medical and 
surgical procedures provide a standard definition of these 
procedures enabling physicians to describe their services in 
a manner readily understandable by carriers; 

(2) the numerical codes assigned to each procedure provide 
a readily usable description of the procedure for computer 
operations; and 

(3) the relative value units when used with appropriate 
conversion factors provide a means for pricing services when 
gaps exist in the reasonable charge screens. 

In the early days of Medicare, carriers often used the relative 
value studies as a basis for reasonable charge determinations. That 
is, the carrier would establish a dollar conversion factor which it 
determined to be representative of the prevailing pattern of physician 
charges for use with the appropriate relative value units. 

To illustrate the development and use of a relative value study let's 
look at a simplified example. 

A medical society appoints a panel of its members to study the problems 
of establishing some means of assisting its members in describing 
their services and in setting their fees. In the medical section 
(physician nonsurgical services) the panel chooses as the basic 
procedure to which all others in this section will be compared, the 



18 






routine followup office visit and it assigns to this procedure the 
value of "1." In making this determination the physicians 
working on the relative value study apply a mixture of statistical 
data and professional judgment. Now then, the time, skill, and 
effort to make a comprehensive diagnostic history and examination 
is judged by the physician panel as being six times that which goes 
into a routine followup office visit. Thus, the relative value 
for that service is six units. 

A physician in determining his fee, (or a carrier in computing its 
benefit payment), multiplies the relative value units by a conversion 
factor to arrive at a fee (or benefit payment). The physician 
determines his conversion factor on the economics of his practice; 
the carrier determines its conversion factor after analyzing all 
claims for the procedures in the medical section. 

The following is a page from the Relative Value Study taken from 
the copyrighted material of the California Medical Association. It 
has been reproduced with the permission of the California Medical 
Association and grateful acknowledgement is made to them for its 
use. 



19 



MEDIUM! 
fc—W I Informaflon and Instructions 

1. The following visits, examinations, consultations and 
etmilar services are the most frequently recurring: and widely 
variable Items of medical care. The time requirements of 
these aervices range from the briefest possible contact with 
the patient to the time-consuming interview and exhaustive 
examination needed to appraise a complex medical problem. 
The following gradation of aervicea is listed in an attempt 
to reflect the relative values of the various timet and »kilU 
required. These aervicea may be employed for care of illness 
or health auperviaion. 

Health supervision does not involve aa a primary purpose 
the diagnoaia and treatment of illneaa. Its purposes include 
an appraiaal of the individuality and developmental level of 
the patient and the promotion of optimal health and per- 
sonality growth aa well aa the prevention of illness. These 
services are included in items 9000 through 9030 in accord- 
ance with time and complexity of the aervicea rendered. (See 
9050, et seq. for peyehiatrie aervicea) 

1 (t): Those items preceded by a (t) may be used by all 
physicians, but are to be used when the problem appears to 
be of a aerioua or difficult nature requiring additional time 
and/or special study, e.g.. Internal Medicine, Pediatric*, 
Neurology, etc. Written reports shall be furnished upon re- 
quest 

8. "Sv." Items: "Sv." in the value column indicates the 
value la to be calculated as the sum of the various services 
rendered, (e.g., office, home, nursing home or hospital visit, 
consultation or detention, etc.) according to the ground rules 
covering those aervicea 

4. Medical care of an unusual or unlisted value may occur 
which represents a type of aervice over and beyond listed pro- 
cedures. If substantiated "By Report" (aee Rule 5), addi- 
tional unit values may be warranted. 

6. "Br Report": When the value of a procedure If to be 
determined "By Report," information concerning the nature, 
extant and need for the procedure or aervice, the time, the 
■kill and the equipment neceaaary, etc, is to be furnished. A 
detailed clinical record ia not neceaaary. 

6. "Independent Procedure": Certain of the liated pro- 
cedures are commonly carried out as an integral part of a 
total service, and as such do not warrant a separate charge. 
When such a procedure is carried out aa a separat* entity, 
not immediately related to other aervicea, the indicated value 
for "Independent Procedure" is applicable. 

T. Values for mileage, night calls, Sunday and holiday 
ealla, preparation of special reports, etc., are liated under 
"Other Services" in this section (Items 9070-9075). 

8. Necessary drugs, supplies and materials provided by tne 
physician may be charged for separately. 

fi. Values for other diagnostic, therapeutic, surgical, anes- 
thesia, x-ray and laboratory procedures are liated in the sec- 
tions entitled "Surgery," "Anesthesia," "Radiology" and 
"Laboratory." 



omci VISIT! 



'Initial office visit, routine, n«w patient or new 

illness, history and examination 2.0 

Initial (or subsequent) office visit, complete 
diagnostic history and physical examination, 

ESTABLISHED PATIENT OH MINOR CHRONIC ILLNESS, 

including initiation of diagnostic and treatment 

frogrsm. 8.6 
nitial (or subsequent) office visit, complete 
diagnostic history and physical examination, 
NEW patient or major iLLNEsa, including initia- 
tion of diagnostic and treatment programs 6.0 

this pace. Ru!« s, to calculate value of th 1 jrvlce. 



mrtlCIAM COUPIIANCI OPTIONAL 



»000 

1SO01 



tMOS 



»003 



9004 
T9005 



19006 
19007 



t»006 



MiDicms 

l«Ul; VUlTti CeVHiUlTATIOHS 
KfXWJiT 



Follow-up office visit, rriep; e.g., routine Injec- 
tion, minimal dressing, etc 0.8 

Follow-up office visit, routine 1.0 

Follow-up office visit necessitating professional 

care over and above routine visit 1.6 

Follow-up office visit, prolonoed, over and 

above 9005 8-0 

Follow-up office visit necessitating complete re- 
examination and re-evaluation of patient as * 

whole (continuing illness) 8.0 

Reexamination, comprehensive diagnostic his- 
tory and re-«valuation, established patient, (an- 
nual type) 4.0 



KOMI or NURSING (CONVALESCENT) 
HOMI VISITS 



9010 
♦9011 



t9012 



9013 



9014 

T9015 



t9017 



9018 



9020 



Initial home visit, routine, new patient or new 

illness, history and examination 2.5 

Initial home visit, complete diagnostic history 
and physical examination, established patient 
or minor chronic illness, including initiation 

of diagnostic and treatment programs 4.4 

Initial home visit, complete diagnostic history 
and physical examination, new patient or ma- 
jor illness, including initiation of diagnostic 

and treatment programs 7.0 

Follow-up home visit, briep; e.g., routine injec- 
tion, minimal dressing, etc 1-6 

Follow-up home visit, routine t.0 

Follow-up home. visit necessitating professional 

care over and above routine visit 8,0 

Follow-up home visit necessitating complete 
re-examination and re-evaluation of patient as a 

whole (continuing illness) 8.6 

Home visit each additional member of same 
household • !•<> 



HOSPITAL VISITS 



I vm ax hospital visit, routine history and physi- 
cal examination, including initiation of diagnos- 
tic and treatment programs and preparation of 

hospital records 5.0 

T9021 Initial hospital visit, complete diagnostic his* 
tory and physical examination, established fa- 
TTENT OK MIN0K CHRONIC illness, including ini- 
tiation of diagnostic and treatment programs 
and preparation of hospital records 6-0 

t9022 Initial hospital visit, complete diagnostic his- 
tory and physical examination, NEW patient or 
major ILLNESS, including initiation of diagnostic 
and treatment programs and preparation of hos- 
pital records 6*0 

9024 Follow-up hospital visit, routine 1.0 

f9025 Follow-up hospital visit neceaaitating ears oyer 

and above routine visit t.0 

tOOST Follow-up hospital visit neceaaitating complete 
re-examination and re-evaluation of patient as a 
whole 8.0 



CONSULTATIONS 

A consultation is considered here to include those aervicea 
rendered by a phyaician whoae opinion or advice is requested 
by another physician or an agency in the evaluation and/or 
treatment of a patient's illneaa. When the consultant phyai- 



20 



15. Other health services: The criteria applicable to the customary 
charge and prevailing charge also apply to charges for other 
health services such as; services for ambulance services, durable 
medical equipment (whether purchased or rented), independent 
laboratory services, prosthetic devices, injections, etc. In 
the following paragraphs we shall examine some of these services 
in detail. 

Ambulance services - Medicare pays for ambulance services on 

the basis of the standard customary and prevailing charge criteria. 

Ambulance companies may charge for their services on the basis of: 

(a) a base rate - a dollar amount for the pick-up and delivery of 

a patient, within a fixed geographical area; and/or (b) mileage - a 
dollar amount for each mile from the firm business location to the 
location of the patient. Ambulance services may be provided by a 
number of different organizations and this has an influence on the 
fees charged. Such suppliers are: (a) independent commercial 
operations which must charge a fee high enough to stay in business, 

(b) municipal and/or volunteer companies, which may provide their 
services free or for donations only, and (c) funeral homes which 

by using the same vehicles, garages, etc., have lower operating costs 
and therefore charge lower fees . 

Durable medical equipment - Durable medical equipment is equipment 
which (a) can withstand repeated use, and (b) is primarily and 
customarily used to serve a medical purpose, and (c) generally is 
not useful to a person in the absence of an illness or injury, and 
(d) is appropriate for use in the home. All requirements of the 
definition must be met before an item can be considered to be durable 
medical equipment. Payment for durable medical equipment is made 
according to the standard customary and prevailing charge criteria. 
One problem in establishing reasonable charge screens has been the 
literally thousands of items of durable medical equipment available, 
the many manufacturers of such goods , and the price variations 
within each generic type of item. 

Independent laboratory services - The patient receiving laboratory 
services may be billed directly by the physician who performs his 
own laboratory services or who obtains services from an independent 
laboratory or another physician's laboratory. The patient may also 
be billed directly by an independent laboratory for services it has 
performed. The reasonable charge determination for the laboratory 
services is based on the customary charge made by the physician or 
other person rendering the laboratory service and on the prevailing 
charge in the locality for these services. 



21 



Medicare reimbursement rules also require that the reasonable charge 
for a laboratory test that was performed by an independent laboratory, 
but billed by an attending physician, be related to the cost the physician 
incurred in obtaining the service for his patient. In addition to the 
reasonable charge for the laboratory test itself, the Medicare carriers 
are permitted to allow as reasonable a nominal charge by the physician 
for the drawing of specimens and handling expenses, were it the customary 
practice of the particular physician and the prevailing practice in the 
medical community to bill separate charges for such services. 

Prosthetic devices - A prosthetic device is one which replaces all 
or part of an internal body organ, or replaces all or part of the 
function of a permanently inoperative or malfunctioning internal 
body organ. By and large prosthetic devices are fitted to the 
individual patient. As a result many prosthetic devices furnished 
to Medicare beneficiaries are custom made and fitted. For this reason 
the reasonable charge for such items is often determined on a 
case-by-case basis. 

Injections - Where a separate charge for an injection is submitted by 
a physician, and it is the prevailing practice in the community to 
make such an additional charge, the maximum allowable charge may not 
normally exceed the approximate ingredient and supply cost plus a 
$2 allowance for the injection service. Reasonable charge screens 
for injections should therefore be based on: (1) a flat $2 amount 
for the service of the physician (or his office nurse) in providing 
the injection; plus (2) the current cost of the most frequently 
administered dosage of the drug, as reflected in sources such as 
Drug Topics Red Book or the Blue Book , (the latest editions), and the 
cost of supplies such as syringes and needles. However, in cases 
involving unusual circumstances, an additional allowance above the $2 
amount for the physician services may be considered provided proper 
documentation is supplied. For example, injections such as those 
that require the precise placement of a needle into inflamed, painful, 
or target areas or the injection of dangerous drugs may require that 
only a physician provide this service. Consequently, injections of 
this nature should not be considered routine and appropriate allowances 
should be made. In these instances, the carrier may establish customary 
and prevailing charge screens to reflect the actual practice of 
physicians in a locality. 

Chronic Renal Disease Program - Patients with end-stage renal disease 
are covered by Medicare but some of the payments for the complex 
medical services they receive are not based on the usual customary 



22 






and prevailing charge rules. Special program allowances are applied 
to outpatient maintenance dialysis treatments that are performed 
either inside or outside a hospital. In addition, there are payment 
limitations for some of the services physicians provide to patients 
receiving maintenance dialysis and surgeons provide to patients 
undergoing a kidney transplantation operation. (See the Handbook, 
"Medicare Coverage of Kidney Dialysis and Kidney Transplant Services," 
for a further discussion of these payments.) 

16. The Medicare Act, in section 1842(b)(3)(B), specifies that the 

reasonable charge for a service may not be higher than the charge 
applicable for a comparable service under comparable circumstances 
to the carrier's own policyholders and subscribers. In practice, 
the term "comparability" has been interpreted rather strictly by 
Medicare carriers. New guidelines to provide a more universal 
application of comparability are therefore now being formulated. 



23 



PART 3 - GLOSSARY 



25 



GLOSSARY OF TERMS 



ACTUAL CHARGE A charge made by a physician or other supplier of 
Part B medical services, which is the basic data used in the deter- 
mination of reasonable charges. 

ARRAY The term describing an ordered arrangement of charge data in 
the carriers 1 files. For reasonable charge purposes it implies an 
ascending order of charges (i.e., the lowest amount at the top and 
the highest amount at the bottom) . 

ASSIGNMENT A method of Medicare payment in which the physician or 
other supplier of Part B services applies directly to the carrier for 
reimbursement (with the beneficiary's approval). It constitutes an 
agreement by the physician (or other supplier) that his total charge 
will not exceed the carrier's determination of the reasonable charge. 
The beneficiary is responsible only for any of the Part B annual 
deductible not yet met, plus 20 percent of the balance of the reason- 
able charge. The beneficiary cannot be billed for the difference 
between the submitted charge and the reasonable charge. 

BASE YEAR AND CALENDAR YEAR Carriers develop revised customary and 
prevailing charge screens after the end of the calendar year, based 
upon all available charge data for services during all of that 
calendar year (January 1 through December 31). They implement these 
screens at the beginning of the following fee screen year. 

Example: The base year for rates effective with the beginning of 
fee screen year 1978 (7-1-77) is the calendar year 1-1-76 through 
12-31-76. 

CARRIER A commercial insurance firm or Blue Shield plan administering 
Part B of Medicare. It is distinguished from commercial insurance plans 
or Blue Cross plans administering Part A which are referred to as 
intermediaries . 

CHARGE DATA The statistics on actual charges collected from submitted 
claims (and all other available sources) and used as the bases for the 
carriers' computations of the customary, prevailing, and reasonable 
charges . 

COINSURANCE A provision by which the insured person shares part of 
his own medical expenses. In reasonable charge discussions it refers 
to the 20 percent of reasonable charges for which the Medicare bene- 
ficiary is responsible after the Part B annual deductible has been met. 

COMPARABILITY PROVISION A provision of the Medicare Act specifying 
that the reasonable charge for a service may not be higher than the 
charges applicable for comparable services and under comparable circum- 
stances to the carriers' own policyholders and subscribers. 

27 



COVERED SERVICES The term used to describe the medical and other 
health services for which Medicare Part B payment can be made. 

CUSTOMARY CHARGE The amount computed by the carrier based on actual 
charge data for a specific service performed by one physician (or 
supplier) to his patients in general. It is a computation essential 
to the determination of the reasonable charge in a given claim. 

DEDUCTIBLE The portion of reasonable charges (for covered services 
each calendar year) for which a beneficiary is responsible before his 
benefits begin. For Medicare, currently, it refers to the first $60 
of incurred expenses in a calendar year determined to be reasonable 
charges by the carrier. 

DURABLE MEDICAL EQUIPMENT Equipment which can stand repeated use, 
is primarily and customarily used to serve a medical purpose, and 
generally is not useful to a person in the absence of illness or 
injury. 

ECONOMIC INDEX A cumulative figure representing changes in physicians' 

costs of practice and changes in general earnings levels which acts 

as a ceiling on increases in prevailing charges for physicians' services. 

FEE SCREENS Another term describing the customary, prevailing, and 
reasonable charge amounts established by the carrier at the beginning 
of each fiscal year. It implies that charges (or fees) in excess of 
these computed rates are "screened out." 

FEE SCREEN YEAR Within the meaning of reasonable charge discussions, 
the fee screen year, beginning in 1976, runs from July 1 of any calendar 
year through June 30 of the following calendar year. Example: Fee screen 
year 1978 begins July 1, 1977, and runs through June 30, 1978. 

GENERAL PRACTITIONER A doctor of medicine who generally performs a 
wide range of medical services as opposed to one who specializes only 
in certain areas (see Specialist). 

HISTORY FILE A listing of charges collected from submitted claims 
(SSA 1490' s) on a specific physician or other supplier, arranged in 
ascending order, and used in the computation of the customary, prevailing, 
and reasonable charges. 

LOCALITY For the purpose of making reasonable charge determinations, a 
locality is identified as a geographic area for which a carrier derives 
the prevailing charges for services. Usually, a locality is a political 
or economic subdivision of a State which should include a cross-section 
of the population with respect to economic and other characteristics. 



28 






MEDIAN The statistical term indicating the midpoint in an array 
of charge data. The median charge is the lowest charge below which 
at least 50 percent of the actual charges fall. 

"OTHER" SUPPLIERS The term used to describe nonphysician suppliers of 
covered Part B medical services and supplies under Medicare. 
Examples: ambulance companies, drug stores dealing in wheelchairs, 
crutches, etc. 

PERCENTILE The value in an array of data below which a given percentage 
of the items in the array fall. For example, in determining the 
prevailing charge for a service, carriers calculate the 75th percentile 
of the array of customary charges for the service (see Prevailing Charge). 

PREVAILING CHARGE Generally, the lowest charge on an array of 
customary charges which is high enough to include 75 percent of all the 
customary charges. 

PROFILE The term describing the carrier's record of calculated 
customary charges for each physician and supplier of Part B medical 
services. 

PROSTHETIC DEVICE A device which replaces all or part of an internal 
body organ, or all or part of the function of a permanently inoperative 
or malfunctioning internal body organ. Examples: An artificial leg, 
cataract lenses, a cardiac pacemaker. 

REASONABLE CHARGE An individual charge determination made by a carrier 
on a covered Part B medical service or supply. In the absence of 'unusual 
medical complications or circumstances it is the lowest of 1) the 
physician's or other person's customary charge for that service; 2) the 
prevailing charge for similar services in the locality; and 3) the actual 
charge of the physician or other person rendering the service. 

REIATIVE VALUE STUDY (RVS) A method by which certain medical societies 
have identified the relative value of each procedure or service provided 
by physicians in relation to the values of other services. Where there 
is no reliable statistical basis for determining the customary charge of 
a physician or other person for a particular medical procedure or service, 
or for determining the prevailing charge, the carrier may develop or use 
an existing relative value study. 

SPECIALIST A physician who works primarily in a certain area of 
medicine; e.g., neurosurgery, ophthalmology, urology, internal medicine, 
general surgery. A specialist may be so designated because of board 
eligibility, board certification, or because. of his own restriction of 
his practice to a certain specialty. 



29 



UNUSUAL CIRCUMSTANCES Medical complications or other circumstances 
requiring additional time, effort or expense to such an extent that 
the service is essentially different from the usual. These "unusual 
circumstances" may justify payment in excess of the established customary 
or prevailing charges for the more common service. 

UPDATING A term describing the revision of customary, prevailing, 
and reasonable charge screens, using a new base year's charge data. 
It takes place at the beginning of each fee screen year, or as soon 
thereafter as the new screens can be incorporated into the carrier's 
claims processes. 

WEIGHTING Recognizing the number of times each value occurs in a 
distribution. This permits each value to express its individual effect 
on a calculation. For example, in establishing the prevailing charge 
for a particular procedure, the carrier weights each calculated customary 
charge by how often the procedure was performed by that provider. 



30 



CMS LIBRARY 




3 BCH5 DDDDBb35 7 



••.